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Aircraft leasing in IFSC

Team Finserv | finserv@vinodkothari.com

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Our other resources on IFSC

  1. Ship leasing from IFSC: A new business takes shape
  2. Financial entities in IFSC: A primer
  3. Finance Companies / Units in International Financial Services Centre (IFSC)
  4. Budget 2023 and Gift IFSC: Making Things Happen
  5. Consultation paper on the proposed IFSCA (Payment Services) Regulations, 20XX: An Analysis
  6. IFSC Banking Units allowed to deal in Structured Finance Products
  7. Banking & Finance units in IFSC- A regulatory overview

Ship leasing from IFSC: A new business takes shape

Team finserv | finserv@vinodkothari.com

The International Financial Services Centre, from Gift City, was intended to enable leasing of aircrafts as well as ships. Such leases have traditionally been done from offshore jurisdictions, and the admitted intent of IFSC was to bring these businesses to IFSC.

Ship financing business in India and the world

India is a very important player in the global shipping market, and is ranked no 17 in terms of shipping volume. It has a coastline of about 7,517 km, with 12 major and 205 minor ports. Additionally, it is estimated that about 95% of India’s goods trade by volume and 70% by value is done through maritime transport.

Ship financing volume globally is about USD 500 billion, largely consisting of bank finance. There are two types of leases against ships: bare board charter, and voyage or time charter. In case of the former, the lessor merely provides the vessel, with neither the crew or any other services, whereas in case of the latter, the ship is provided on time basis, with all services.

India is a substantial importer of shipping freight. It is estimated that annually, Indian companies pay about $75 billion for seaborne freight to foreign shipping companies. 

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Budget 2023 and Gift IFSC: Making Things Happen

Anirudh Grover, Executive | finserv@vinodkothari.com

Background and Existing Framework

The International Financial Services Centre (“IFSC”) situated in the GIFT city is deemed to be a quasi-foreign territory from the lens of Foreign Exchange Management Act, 1999 however a domestic area under the tax regime. The objective of setting up specified territory lies in the benefits an IFSC jurisdiction provides in the form of free flow of foreign transactions and investor confidence; this setting up is commonly termed as onshoring the offshore. 

In order to materialize the underlying objective, a specific regulatory framework has been designed which includes the incorporation of the following major entities:

  1. Finance Companies: The concept of Finance Companies are pari materia to the concept of non-banking financial companies, the unified regulator IFSCA has issued regulations specifically dealing with the concept of Finance Companies. The detailed write up of which can be found in our write up.
  2. Fund Management Entities (‘FMEs’): FMEs are entities which act as pooling vehicles for various kinds of investors, this concept of FME’s is equivalent to the concept of Alternative Investment Fund. A designated regulatory framework has been specially established by the unified regulatory for governing the framework of FMEs in IFSC, the details of which can be captured from our write up
  3. Banking Units: As far as Banking Units are concerned, the IFSCA has outlined a framework through which Indian banks or foreign banks can set up their shop in the form of branches in IFSC GIFT City. The IFSCA (Banking) Regulations, 2020 are the principal regulations governing the Banking Units established in the IFSC GIFT City. My colleague has already covered the regulatory overview on this aspect in our write up

Apart from these entities there are other entities as well which are running their businesses from IFSC GIFT City which includes Fintech Entities, Capital Market Intermediaries and Insurance Intermediaries. The Union Budget of 2022 paved the way for bringing fundamental changes in the IFSC jurisdiction which resulted in the establishment of a regulatory framework namely IFSCA (Setting up and Operation of International Branch Campuses and Offshore Education Centres) Regulations, 2022. By virtue of these regulations now Foreign Universities have been allowed to set up their base in IFSC. Further the Union Budget 2022 also laid the ground for establishment of an Arbitration Centre which would allow disputes to be resolved in record time. 

Albeit these announcements came out to be a key in evincing interest in the IFSC jurisdiction however it is perceived that there are certain pivotal areas of law which require further modifications/clarifications which is expected to be a part of the Union Budget of 2023.

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Banking & Finance units in IFSC- A regulatory overview

– Siddarth Goel (finserv@vinodkothari.com)

Introduction- IFSCs

The stage of development of financial markets infrastructure in a country, amongst many other things, is a mirror of sound legal regulations, corporate governance, judicial certainty, and debtor protection regime within the country. The inflow of global capital is quintessential for financial markets development and allocation of adequate capital resources in growth sectors. In a move to make India a hub for global capital flow, Gujarat International Finance Tech-City (GIFT) has been established as a globally benchmarked International Financial Service Centre (GIFT-IFSC). GIFT-IFSC is India’s first dominant gateway for global capital flows in and out of the country.  The GIFT IFSC supports a gamut of financial services inter alia, banking, insurance, asset management, and other financial market activities. Prior to dealing with the regulatory framework governing financial units established in GIFT-IFSC, it is important to understand the broad function of an IFSC.

IFSCs are the Offshore Financial Centers (OFCs) that cater to customers outside their own jurisdiction. IMF defines OFCs as any financial center where the offshore activity takes place. However, this does not limit financial institutions in OFCs from undertaking domestic transactions. Therefore practical definition propounded by IMF is;

“OFC is a center where the bulk of financial sector activity is offshore on both sides of the balance sheet, (that is the counterparties of the majority of financial institutions liabilities and assets are non-residents), where the transactions are initiated elsewhere, and where the majority of the institutions involved are controlled by non-residents.”

Units set up in GIFT-IFSC can broadly be categorised on the basis of business activity intended to being undertaken by the entity.

 

This write-up covers regulations governing banking and financial services undertaken by Banking Units and Finance Companies set up in IFSC. The first part touches upon the benefits of setting up a unit in IFSC. The second part covers Banking Units and permitted financial activities. The third part covers Financial Companies in IFSC along with permissible activities and capital requirements. The fourth part covers financial service transactions to and fro between a financial unit based in IFSC and domestic tariff area (DTA). The last part deals with the applicable  KYC/PMLA compliances and the currency of transactions with units based in IFSC.

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One-stop guide for all Regulatory Sandbox Frameworks

-Kanakprabha Jethani (kanak@vinodkothari.com)

Background

The International Financial Services Centres Authority Act, 2019 was enancted on December 19, 2019, providing powers to the International Financial Services Centres Authority (IFSCA) to regulate financial products, financial services and financial institutions in the International Financial Services Centres. Under such powers, the IFSCA has on October 19, 2020, introduced a Regulatory Sandbox (RS) framework[1], to develop a world-class FinTech hub at the IFSC located at GIFT City in Gandhinagar. Under the said framework, entities operating in the capital market, banking, insurance, and financial services space shall be granted certain facilities and flexibilities to experiment with innovative FinTech solutions in a test environment. The framework details among other things the eligibility criteria, applicability, process of application, and regulatory exemption for operating in the RS..

Further, there are already separate RS frameworks issued by the sectoral regulator for various market participants. Hence, it becomes crucial to understand the unique offering of this IFSC framework. The below write-up intends to discuss the same.

What is Regulatory Sandbox?

Regulatory sandboxes or RS is a framework that allows innovative projects to undergo live testing in a controlled environment where the regulator may or may not permit certain regulatory relaxations or may provide certain additional facilities for testing.

The objective is to allow new and innovative projects to conduct live testing and enable the approach of learning by doing. RSs are created to facilitate the development of potentially beneficial innovations, which are otherwise barred to operated due to the construct of the existing regulatory framework of the country.

We have a separate write-up on the concept, benefits, limitations and the history of RS, which may be referred here- http://vinodkothari.com/2019/04/safe-in-sandbox-india-provides-cocoon-to-fintech-start-ups/

Basic features of the IFSC RS Framework

The framework allows any person, including individuals, to make an application under the RS. This is a unique feature that allows not only businesses but students, researchers as well as professionals to apply. However, there is a geographical limit to this RS. It can only operate within IFSC GIFT city. Further, considering the need for information in such projects, the framework, as an additional step, shall provide the participants with access to market-related data, particularly, trading and holding data, which is otherwise not readily available, to enable them to test their innovations effectively before the introduction of such innovations in a live environment.

Comparison of basic features of various RS frameworks

FeaturesIFSC frameworkRBI framework[2]SEBI framework[3]IRDA framework[4]
Frequency of applicationThis is an on-tap framework. Hence, an application may be made anytime.Based on the cohort framework i.e. end-to-end sandbox. The RBI rolls out a theme based cohort, say digital payments, under which fintech intending to provide services relating to the theme shall apply.[5]

 

Applications can be made only when a cohort is live.

This is an on-tap framework. Hence, an application may be made anytimeBased on the cohort approach.[6]
Applicability/Eligibility to applyFollowing intending to operate in the IFSC GIFT city.

·   All entities registered with SEBI, RBI,  IRDAI and PFRDA

·   All startups registered with Startup India and meeting the criteria of a start-up[7]

·   Companies incorporated and registered in India

·   Companies  incorporated  and  regulated  in FATF compliant  jurisdictions

·   Individuals who are citizens of India

·   Individuals from FATF compliant jurisdiction[8]

Fintech companies including startups, banks, financial institutions and any other company partnering with or providing support to financial services businesses which satisfies the detailed eligibility criteria laid down.[9]Entities registered with SEBI under section 12 of SEBI Act, 1992·   Insurers

·   Insurance intermediaries

·    any person (other than individual) having net worth of Rs. 10 lakhs or more in the previous financial year

·   Any other person recognized by IRDAI

PurposeAdding significant value to the existing offering in the capital market, banking, insurance or pensions sector in India/IFSC.For the introduction of innovative Products/Services in retail payments, money transfer services, marketplace lending, digital KYC, financial advisory services, wealth management services, digital identification services, smart contracts, financial inclusion products, cybersecurity products, mobile technology applications, data analytics, API services, applications under blockchain technologies, Artificial Intelligence and Machine Learning applicationsAdding  significant  value to the existing offering in the Indian securities marketFor promoting or implementing innovation in

insurance in India in any one or more of the following categories:

(a) Insurance Solicitation or Distribution

(b) Insurance Products

(c) Underwriting

(d) Policy and Claims Servicing

(e) Anv other category recognised by the Authority.

Timeline for review of the application30 working daysAround 4 weeks + 4 weeks + 3 weeks (including preliminary screening, test design, and application assessment)30 daysNo timeline prescribed under the regulations
Testing durationMaximum 12 months, extendable upon requestMaximum 12 weeks, extendable on requestMaximum 12 months, extendable upon requestMaximum 6 months, extendable on request
ExclusionsNo such exclusions

 

 

 

 

 

 

 

 

 

 

RS  shall not be available for the following:

·       Credit registry

·       Credit information

·       Crypto currency/Crypto assets services

·       Trading/investing/settling in crypto assets

·       Initial Coin Offerings, etc.

·       Chain marketing services

·       Any product/services which have been banned by the regulators/Government of India.

 

No such exclusionsNo such exclusions
Extending or exiting the RS·      At the end of the testing period, relaxations provided on regulatory requirements shall expire.

·      Upon completion of testing, IFSCA shall decide whether to permit the innovation to be introduced.

·      The applicant may request for an extension period

·      The applicant may exit the sandbox on its own by giving a prior notice to IFSCA.

·      At the end of the sandbox period, the relaxations provided will expire and the entity must exit the RS.

·      In case an extension is required, the entity should apply to the RBI at least 1 month before the expiration thereof extended period.

·      The entity may also exit from the RS by informing the RBI, 1 month in advance.

·      At the end of the testing period, relaxations provided on regulatory requirements shall expire.

·      Upon completion of testing, SEBI shall decide whether to permit the innovation to be introduced.

·      The applicant may request for an extension period

·      The applicant may exit the sandbox on its own by giving a prior notice to SEBI.

·      Applicant may request IRDAI for extension for a maximum of 6 months

·      Applicant shall submit a report within 15 days of completion of testing period on how the proposal met the stated objectives, based on which the project may be launched under the extant regulatory framework

Revocation of the approvalIFSCA may revoke the approval at any time before the end of the testing period, if the applicant:

·   fails to carry out risk mitigants.

·   Submits false information or conceals material facts in the application

·   Contravenes any applicable law

·   Suffers a loss of reputation

·   Undergoes into liquidation

·   Carries on business in a manner detrimental to users or the public

·   Fails to   address any   defects in the   project

·   Fails to implement directions given by IFSCA

The testing will be discontinued any time at the discretion of the RBI:

·   if the entity does not achieve its intended purpose

·   if the entity is unable to comply with the relevant regulatory requirements and other conditions

·   if the entity has not acted in the best interest of consumers

SEBI may revoke the approval at any time before the end of the testing period, if the applicant:

·   fails to carry out risk mitigants

·   Submits false information or conceals material facts in the application

·   Contravenes any applicable law

·   Suffers a loss of reputation

·   Undergoes into liquidation

·   Carries on business in a manner detrimental to users or the public

·   Fails to   address any   defects in the   project

·   Fails to implement directions given by IFSCA

The Chairperson of the IRDAI may revoke the permission so granted at any time, if it is of the view that the

activities carried out are not meeting the prescribed conditions/ are in violation of the provisions of applicable laws.

 

Conclusion

The IFSC RS framework seems to be drafted on lines of the RS framework issued by the SEBI. The only differentiating factor is the inclusion of all kinds of applicants operating for various purposes. Each of the frameworks discussed above has their peculiarities, and hence, the suitability to one’s design of business may vary. None of the RSs other than the ones introduced by IRDAI have been able to reap any concrete results lately. However, with the growing acceptance of technology, it is only a matter of time before we see various kinds of innovations in the way we transact every day.

 

[1] https://ifsca.gov.in/Viewer/Index/99

[2] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=938

[3] https://www.sebi.gov.in/legal/circulars/jun-2020/framework-for-regulatory-sandbox_46778.html

 

[4] https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_NoYearLayout.aspx?page=PageNo3886

[5] After the introduction of the framework in August 2019, only 1 cohort has been announced i.e. in November 2019 themed ‘Retail Payments’ (https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48550)

[6] After introduction of Insurance Regulatory and Development Authority of India (Regulatory Sandbox) Regulations, 2019 in July 2019, 2 cohorts have been introduced:

[7] Definition of startups- https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/198117.pdf

[8]List of FATF compliant jurisdictions- https://www.fatf-gafi.org/countries/

[9] Refer- http://vinodkothari.com/2019/04/safe-in-sandbox-india-provides-cocoon-to-fintech-start-ups/

 

Other related write-ups: